NYT Claims European Firms Make Location Decisions Based on Spot Energy Prices

Saturday, 29 December 2012 08:35

Everyone who pays even casual attention to energy prices know that they fluctuate dramatically. The price of a barrel of oil soared from around $40 in 2004 to a peak of $150 in 2008, then fell back under $40 briefly in the wake of the economic collapse later that year. While this run-up and crash was extraordinary, large fluctuations are not. This is why it is surprising to see the NYT tell us that many European manufacturers are planning to move their operations to the United States based on the lower cost of energy in the United States.

This claim is especially bizarre for two reasons. First, the large differences in prices will almost certainly not persist. The fracking boom in the United States has pushed gas prices down to a level that is roughly half of its level four years ago. At current prices much fracking is not profitable and producers have already slowed their rate of drilling.

In addition, producers have plans to export liquid natural gas. While it takes time to build facilities, it is likely that the U.S. will soon be exporting large amounts of natural gas. This will have the effect of equalizing prices between Europe and the United States in the same way that trade equalizes the price of oil in Norway, a huge oil exporter, and Italy, which imports almost all its oil. While there will still be differences in price due to transportation costs and also tax rates, most of the current gap in prices would be eliminated. Presumably the people who run major companies in Europe understand this fact and take it into consideration in their decision to locate factories that may be operating for 30-40 years.

The other strange aspect to this piece is that it implies that Europe can't compete with the United States due to differences in energy costs. The Commerce Department would seem to strongly disagree with this view. It reports that the United States trade deficit with the European Union was $94.8 billion through the first eight months of 2012, an increase of almost 20 percent from the deficit in 2011.

This seems like a clear case of who are you going to believe, the NYT saying that energy costs have made Europe uncompetitive or the Commerce Department telling us that its trade surplus is growing.